Tax-Managed Value Fund (A)

A Word On The Markets  as of Dec 31, 2011

Political irresolution characterized most of the developed world during the fourth quarter of 2011, creating an atmosphere of uncertainty that subjected global equity markets to dramatic volatility. In the U.S., the congressional Super Committee failed to identify $1.2 trillion in federal spending cuts in November. Then, in December, Congress waffled once more and failed to approve until the twelfth hour a two-month extension of unemployment benefits and the payroll-tax holiday. In Europe, EU officials were unable to convince the markets that they had a viable plan to stem the region's sovereign debt crisis. In spite of this, the U.S. economy displayed signs of economic growth in the fourth quarter, spurred largely by lower energy prices. Looking globally, manufacturing data showed expansion, including in China, where there have been concerns about slowing.

Despite extreme volatility during the fourth quarter, global equity markets posted solid positive returns. The MSCI EAFE Index¹⁰ rose 3.33%, while the broader-based MSCI All Country World Index¹¹ rose 7.18% during the quarter. In the U.S., the S&P 500 Index¹² added 11.82% during the quarter to finish up 2.11% for the calendar year, while the blue chip Dow Jones Industrial Average¹³ jumped 12.78%, posting a return of 8.38% for the year. Small-cap stocks outperformed large caps during the quarter, with the Russell 2000 Index¹⁴ gaining 15.47% compared to 11.84% for the large-cap Russell 1000 Index¹⁵. Across capitalizations, value stocks outperformed growth stocks.

Performance Summary 

Against this backdrop, Eaton Vance Tax-Managed Value Fund trailed its benchmark, the Russell 1000 Value Index², for the quarter ended December 31, 2011, returning 11.58% at net asset value versus the benchmark's 13.11% return.

• Stock selection proved challenging as volatility remained elevated during the quarter. Additionally, the market's preference for lower-quality and smaller- capitalization stocks resurfaced, posing a headwind to the Fund's returns relative to the benchmark.
• The risk on environment that characterized the quarter generally resulted in cyclical groups outperforming defensive areas. The best sectors in the benchmark were the energy, industrials and materials sectors, while the weakest were telecommunication services and utilities.
• All 10 of the economic sectors included in the Russell 1000 Value Index² had positive returns for the quarter and, similarly, the Fund posted positive performance in all 10 sectors in which it was invested.

Contributors 

The Fund outperformed the benchmark in four of the 10 sectors during the quarter. Stock selection was most additive in the consumer staples and financials sectors.

• Stock selection had the largest positive impact in financials, as underweights to Bank of America and Berkshire Hathaway augmented selection gains driven by investments in smaller regional banks, KeyCorp and Fifth Third Bank.
• In consumer staples the Fund's investment in tobacco company, Philip Morris, provided the biggest contributions to relative returns. Additionally, an underweight to Procter & Gamble aided returns as the consumer products giant lagged peers in its space.
• Elsewhere, some of the Fund's more economically sensitive holdings benefited from improving investor confidence. In particular, railroad operator Union Pacific and oil producer Occidental Petroleum contributed to fund performance.

Detractors 

In a reversal from the third quarter, the majority of the Fund's underperformance emanated from the information technology and consumer discretionary sectors. While the Fund posted positive returns in these sectors, returns trailed those of the benchmark.

• After holding up very well in the market's summer meltdown, Fund positions in blue chip technology companies, such as Apple, Microsoft and International Business Machines, lagged the benchmark during the fourth quarter creating a drag on relative returns.
• An investment in application software provider, Oracle, also disappointed as investors reacted negatively to second quarter earnings results.
• In the consumer discretionary space, selection decisions in industries such as media and retail hurt return comparisons. In particular, a position in Time Warner Cable detracted as did lack of exposure to home improvement retailers, Home Depot and Lowes, which snapped back from difficult third quarters.

Investment Outlook And Fund Positioning 

In 2011, major U.S. equity Indexes ended the year basically unchanged though investors endured another gut-wrenching year of ups and downs. Cautious investors are worried about an acceleration of the eurozone crisis in 2012. In the U.S., the 2012 presidential election is expected to dominate the headlines. Despite the numerous global risks, we believe many investors feel that the worst has passed. The economy hit a wall in the first half of 2011 as disruptive forces such as severe storms, floods and high oil prices hindered growth. However, as the economic data continues to come in stronger than expected, optimists believe the transition in the U.S. economy from a soft landing to reacceleration is underway.

We maintain the belief that large-capitalization, high-quality companies with the flexibility to raise dividends, buyback shares or make strategic acquisitions may be well-positioned in what will likely remain a challenging environment in 2012. At quarter end, the Fund had slight overweights in the health care and energy sectors, and modest underweights in the financials and utilities sectors.

The views expressed in this report are those of portfolio manager(s) and are current only through the date stated at the top of this page. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. This commentary may contain statements that are not historical facts, referred to as "forward looking statements". The Fund's actual future results may differ significantly from those stated in any forward-looking statement, depending on factors such as changes in securities or financial markets or general economic conditions, the volume of sales and purchases of Fund shares, the continuation of investment advisory, administrative and service contracts, and other risks discussed from time to time in the Fund's filings with the Securities and Exchange Commission.

Fund invests in an affiliated investment company (Portfolio) with the same objective(s) and policies as the Fund. References to investments are to the Portfolio's holdings. Portfolio profile subject to change due to active management. Percentages may not total 100% due to rounding.

About Risk 

Fund share values are sensitive to stock market volatility. Investments in foreign instruments or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical or other conditions. Market conditions may limit the ability to generate tax losses or to generate dividend income taxed at favorable tax rates. The Fund's ability to utilize various tax-managed techniques may be curtailed or eliminated in the future by tax legislation or regulation. No Fund is a complete investment program and you may lose money investing in a Fund. The Fund may engage in other investment practices that may involve additional risks and you should review the Fund prospectus for a complete description.

No attribution information is available.

Fund invests in an affiliated investment company (Portfolio) with the same objective(s) and policies as the Fund. References to investments are to the Portfolio's holdings. Portfolio profile subject to change due to active management. Percentages may not total 100% due to rounding.

About Risk 

Fund share values are sensitive to stock market volatility. Investments in foreign instruments or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical or other conditions. Market conditions may limit the ability to generate tax losses or to generate dividend income taxed at favorable tax rates. The Fund's ability to utilize various tax-managed techniques may be curtailed or eliminated in the future by tax legislation or regulation. No Fund is a complete investment program and you may lose money investing in a Fund. The Fund may engage in other investment practices that may involve additional risks and you should review the Fund prospectus for a complete description.